Glossary

Securities Exchange that handles approximately 20% of all securities trades within the US.

American-style option

An option contract that can be exercised at any time before the expiration date. Stock Options are American Style.

Arbitrage

Where the simultaneous purchase and disposal of a combination of financial instruments is such that a guaranteed profit is made automatically.

Ask

The price that you buy at and the price that market makers and floor brokers are willing to sell at. The Ask stands for what the market makers and floor traders ask you to pay for the stock (or options or other instrument).

ATM (At the Money)

Where the option exercise price is the same as the asset price.

At the Opening Order

An order that specifies execution at the market opening or else it is cancelled.

Automatic Exercise

The automatic exercise of an ITM (in the money) option by the clearing firm at expiration

A spread where more options (calls or puts) are bought than sold. (the opposite of a Ratio Spread).

Bear Call Ladder

A strategy using calls where the trader sells a lower strike call, buys a higher strike call and another higher strike call.

Bear Call Spread

A bearish net credit strategy using calls where the trader buys a higher strike call and sells a lower strike call. The higher strike call will be cheaper, hence the net credit. Bear Call spreads have limited risk and reward and are more profitable as the underlying asset price falls.

Bear Put Ladder

A spread using puts where the trader sells a lower strike put, buys a higher strike put and another higher strike put.

Bear Put Spread

A net debit spread only using puts where the trader buys a higher strike put and sells a lower strike put. The higher strike put will be more expensive, hence the net debit. Bear Put spreads have limited risk and reward and are more profitable as the underlying asset falls.

Bid

The price the trader sells at and the price that market makers and floor traders are willing to buy at. [the Bid stands for the price at which the market maker will bid for your stock (or options, or other instrument)]

Bid - Ask Spread

The difference between the bid and asked prices. Generally you will buy at the Ask and Sell at the Bid. The Ask is always higher than the Bid.

Blow off Top

A large rise in price followed by a quick drop. Often accompanied with high volume. Usually a technical indicator for the end of a bullish trend.

Bond

A debt financial instrument used by Governments and corporate entities in order to raise capital. The bond obliges the organization to pay its holders a fixed rate of return (coupon) and repay the principal of the debt at maturity. These bonds are traded (the CBOT is one of the major Bond Exchanges) and their values are directly correlated with interest rates and interest rate speculation by the markets. The lower interest rates are projected to be, the more valuable the bond will be.

Breakeven

The point(s) at which a risk profile of a trade equals zero.

Breakout

Where a price chart emerges upwards beyond previous price resistance.

Broker

A person who charges commission for executing a transaction (buy or sell) order.

Bull

Someone who expects the market to rise.

Bull Call Ladder

A spread only using calls where the trader buys a lower strike call, sells a higher strike call and another higher strike call.

Bull Call Spread

Long term bullish strategy involving buying low strike calls and selling same number of higher strike calls with the same expiration date.

Bull Market

A rising market over a period of time (usually a few years).

Bull Put Ladder

A spread using puts where the trader buys a lower strike put, sells a higher strike put and another higher strike put.

Bull Put Spread

Short term bullish strategy involving buying lower strike puts and selling higher strike puts with the same expiration date.

An order stipulating to buy the security at the close of the trading session.

Buy on open

An order stipulating to buy the security at the opening of the trading session.

Buy Stop

A buy order where the price stipulated is higher than the current price. The rationale here is when the buyer believes that if the security breaks a certain resistance then the security will continue to rise.

Buy-Write

A bullish strategy involving buying a stock and selling near term ATM or OTM call options to generate regular income. See Covered Call.

2-legged option trade involving buying a long term option and selling a shorter term option with the same strike price. A Calendar Spread must involve either all call or all put legs, you cannot mix calls and puts together for this strategy.

Call Option

The right, not the obligation to buy an underlying security at a fixed price before a predetermined date.

The oldest commodity exchange in the US. Known for listings in T-bonds, notes and a variety of commodities.

Chicago Mercantile Exchange (CME)

An exchange in which many types of futures contracts are traded in an open outcry system.

Class of options

Options of the same type, style and underlying security.

Clearing House

A separate institution to establish timely payment and delivery of securities.

Close

The last price quoted for the day.

Closing Purchase

A transaction which closes an open short position.

Collar

A low risk bullish strategy involving buying a stock, buying near the money puts and selling out of the money calls.

Closing Sale

A transaction which closes an open long position.

Commission

A charge made by the broker for arranging the transaction.

Commodity

A tangible good that is traded on an exchange. Eg oil, grains, metals.

Commodity Futures Trading Commission (CFTC)

An institution charged with ensuring the efficient operation of the futures markets.

Condor

See Condors

Consumer Price Index (CPI)

An index measuring the change in prices of consumer prices. An important inflation indicator.

Contract

A unit of trading for an option or future.

Correction

A post rise decline in a stock price or market.

Covered Call

A bullish strategy involving buying or owning a stock and selling near term ATM or OTM calls to generate regular income. See "Buy-Write".

Covered Put

A bearish strategy involving shorting stock and shorting a near term put option to create regular income. Considered a high risk strategy.

Covered Short Straddle

A bullish strategy involving buying (or owning a stock), selling near term puts and calls at the same strike price and expiration date. This is a risky strategy, involving almost certain exercise of the put or call and a significant downside risk if the stock price falls.

Covered Short Strangle

A bullish strategy involving buying (or owning a stock), selling near term OTM puts and OTM calls at the same expiration date. This is a risky strategy, involving significant downside risk if the stock price falls.

Credit Spread

Where the simultaneous buying and selling of options creates a net credit into your account (ie you receive more for the ones you sell than those you buy).

Where the simultaneous buying and selling of options creates a net debit from your account (ie you pay more for the ones you buy than those you sell).

Deep In the Money (DITM) Calls

Where the price of the underlying security is far greater than the Call Strike Price.

Deep In the Money (DITM) Puts

Where the price of the underlying security is far less than the Put Strike Price.

Delayed time quotes

Quotes which are delayed from real time.

Delta

The amount by which an option premium moves divided by the dollar for dollar movement in the underlying asset.

Delta Hedge

A strategy designed to protect the investor against directional price changes in the underlying asset by engineering the overall position delta to zero.

Delta Neutral

Where a spread position is engineered so that the overall position delta is zero.

Derivative

A financial instrument whose value is "derived" in some way from the value of an underlying asset source.

Diagonal Spread

2-legged option trade involving buying a long term option and selling a shorter term option with a higher strike price. A Calendar Spread must involve either all call or all put legs, you cannot mix calls and puts together for this strategy.

Discount Brokers

Low commission brokers who simply place orders, and do not provide advisory services.

Divergence

Where 2 or more indicators move in different directions indicating different outcomes.

Dividend

A payment made by an organization to its owners (shareholders), hopefully from profits.

Dow Jones Industrial Average (DJIA)

An index of 30 blue chip stocks traded on the New York Stock Exchange (NYSE). This index is often considered a bellwether of overall market sentiment.

The theoretical value calculation of an option using a pricing technique such as Black-Scholes options pricing formula.

Fibonacci Retracement

Where prices on a chart move off their latest tops or bottoms in swings of 38%, 50% or 62% from their previous bottoms or tops before resuming their original trend direction. 50% is the most common and easiest to spot.

Fill

An order which has been executed.

Fill Order

An order which must be filled immediately or cancelled.

Fill or Kill

An order where a precise number of contracts must be filled or the order is cancelled.

Floor Broker

A member of an exchange who is paid to execute orders.

Floor Trader

An exchange member who trades on the floor of the exchange for their own account.

Fundamental Analysis

Analysis of a stock security which is based on the ability of the organization to generate profits for its shareholders. Such analysis embraces earnings, PE Ratios, EPS, Net Assets, Liabilities, Customers etc.

Futures Contracts

Agreement to buy or sell an underlying security at a predetermined date at an agreed price. The difference between futures and options is that with options the buyer has the Right, not the obligation. With futures, both parties are obliged to fulfil their part of the bargain.

An indicator that measures the expensiveness of an option, the IV is the estimated volatility of a security's price. Typically, higher IV values reflect bearish sentiment and lower IV values reflect bullish sentiment. This is because bearish markets are considered more risky than bullish markets.

Index

A group of assets (often in a similar class of sector or market capitalisation) which can be traded as a single security.

Index Options

Options on the indexes of stocks or other securities.

Interest Rates

The rate at which borrowed money is charged by the lender, usually annualised into a percentage figure.

In the Money (ITM)

Where you can exercise an option for a profit.

In the Money (ITM) Calls

ITM Calls are where the current stock price is greater than the Call Strike Price.

In the Money (ITM) Puts

ITM Puts are where the current stock price is less than the Put Strike Price.

A popular method of visually depicting price bars where the open, high, low, close are shown explicitly.Upward moving price bars are hollow (or green if different colours are used).Downward moving price bars are filled (or red).Different looking bars and different clusters of price bars can lead to different interpretations of future price movements.

Long-term Equity AnticiPation Securities.These are long term stock options with expirations up to 3 years in the future. LEAPs are available in Calls and Puts and are American-style traded options.

Leg

One side or component of a spread

Leg in / Leg out

Legging into a spread entails the completion of just one component part of a spread with the intention of completing the other component parts at more favourable prices later on.Legging out of a spread entails the opposite whereby you exit your spread one component part at a time with the intention of doing so at more favourable prices as the underlying security moves in the anticipated direction.

LIFFE

London International Financial Futures and Options Exchange.

Limit Order

An order to buy at a set price which is at or below the current price of the security.An order to sell at a set price which is at or above the current price of the security.

Liquidity

The speed and ease with which an asset can be traded. Cash has the most liquidity of all assets whereas property (real estate) is one of the most illiquid assets.

Measures the difference between 2 moving averages and is a measure of momentum. As the moving averages drift apart then momentum is increasing and vice versa. Best viewed as a bar chart. Divergence between MACD and price action can indicate a change of trend is imminent.

Margin

An amount paid by the account holder (either in cash or "marginable securities" which is held by the brokerage against non cash or high risk investments, or where the brokerage has lent the account holder the means to undertake a particular trade.

Margin Account

An account where the brokerage lends the customer part of the net debit required to make a trade.

Margin Call

Where the brokerage calls the account holder in order for them to pay more funds into their account to maintain the trade.Note that strategies that involve some form of unlimited risk often require a level of margin to be determined by the brokerage.

Margin Requirements

The amount of cash or marginable securities (eg blue chip stocks) which an account holder must have in his account in order to write uncovered (or naked) options.

Mark to Market

The daily adjustment of margin accounts to reflect profits and losses in such a way that losses are not allowed to accumulate.

Market Capitalisation

The number of outstanding shares multiplied by the value per share.

Market if Touched (MIT) Order

An order that becomes a market order if the price specified is reached.

Market Maker

A trader or trading firm that buys and sells securities in a market in order to facilitate trading. Market makers make a two sided (bid and ask) market.

Market on Close Order

An order that requires the broker to achieve the best price at the close or in the last 5 minutes of trading.

Market on Open Order

An order that must be executed at the opening of trading.

Market Order

Trading securities immediately at the best market prices in order to guarantee execution.

Market Price

The most recent transaction price.

Modified Call Butterfly

A neutral to bullish strategy similar to a Long Call Butterfly except that the OTM bought calls have a strike price nearer to the central strike price of the sold calls.

Modified Put Butterfly

A neutral to bullish strategy similar to a Long Put Butterfly except that the ITM bought puts have a strike price nearer to the central strike price of the sold puts.

Momentum

Where a market direction (up or down) is established.

Momentum Indicators

Technical Analysis indicators using price movement and volume in order to determine market direction.

Momentum Traders

Traders who use momentum as their primary tool to invest.

Moving Average

The average of a security's (or index's) latest prices for a specific period of time (eg 50 days). Another technical analysis tool.

Mutual Fund

An open-ended investment fund that pools investors' contributions to invest in securities such as stocks and bonds.

An indicator that measures the opening buying volume of particular options. Where the reading is positive, more opening calls are being bought than opening puts, and vice versa.

OEX

Standard & Poor's 100 Stock Index.

Offer

The lowest price at which someone is willing to sell.Also can refer to the "Ask" of a "Bid-Ask" spread. See "Ask".

On the Money (At the Money)

See "ATM" or "At the Money".

Open Interest

The total number of options or futures contracts that are not closed or delivered on a particular day.

Open Outcry

Verbal system of floor trading still used at many exchanges (eg the CME and CBOT).

Opening

The beginning of the trading session at an exchange.

Opportunity Cost

The risk of an investment expressed as a comparison with another competing investment.

Option

A security which gives the buyer the right, not the obligation to buy (call) or sell (put) an underlying asset at a fixed price before a predetermined date.

Option Premium

The price of an option.

Option Writer

The seller of an option (usually naked).

Out of the Money (OTM)

Where the option has no intrinsic value and where you cannot exercise an option for a profit.

Out of the Money (OTM) Calls

OTM Calls are where the current stock price is less than the Call Strike Price.

Out of the Money (OTM) Puts

OTM Puts are where the current stock price is greater than the Put Strike Price.

OVI

An indicator that measures options transaction activity by way of Implied Volatility, Open Interest and Options Volume. The OVI ranges from +1 to -1. A persistently positive reading typically correlates with a bullish market, and a persistently negative reading typically correlates with a bearish market. The OVI is best used in conjunction with a chart pattern such as a bull flag, bear flag, or an approach towards support or resistance.

A strategy using all puts or all calls whereby the trader buys OTM options in a ratio of 3:2 or 2:1 to the ITM options he sells. In this way the trader is always long in more options than those he is short in.

Ratio Call Spread

A bearish strategy that involves the trader being short in more options than those he is long in, at a ratio of 3:2 or 2:1. In this way the trader will have an unlimited risk profile with only limited profit potential.

Ratio Put Spread

A bullish strategy that involves the trader being short in more options than those he is long in, at a ratio of 3:2 or 2:1. In this way the trader will have an unlimited risk profile with only limited profit potential.

Real Time

Data which is updated and received tick by tick.

Relative Strength

A technical indicator comparing a security's price action as compared to that of an index or another stock.

Relative Strength Index (RSI)

A technical indicator which is an oscillator that combines price action with volume. Best to use with trending stocks and can be used to indicate potential tops and bottoms.

Resistance

A price threshold on a price chart which is thought to be difficult for the price to burst up through because of past price movements.

Return

The income profit on an investment, often expressed as a percentage.

Reversal Stop (or Stop and Reverse) Order

A stop order which, when activated, reverses the current position from long to short (or vice versa).

Rho

The sensitivity of an option price to interest rates. Typically, call options increase in value as interest rates rise and puts decrease in value as interest rates rise.

Risk

The potential loss of a trade.

Risk Free Rate

The Interest chargeable on Treasury Bills (T-Bills) is generally known as the Risk Free Rate and it is this rate which is used as a component part of the theoretical valuation of options model.

Risk Profile

The graphic depiction of a trade, showing the potential risk, reward and breakeven points as the underlying security price deviates within a range of prices.

A low volatility direction neutral trade that involves simultaneously selling a call and put at the same strike price and with the same expiration date. Requires the underlying asset to be rangebound to make the trade profitable.

Short Strangle

A low volatility direction neutral trade that involves simultaneously selling a call and put at different strike prices (the put strike being lower than the call strike - ie both OTM) and with the same expiration date. Requires the underlying asset to be rangebound in order to make the trade profitable.

Short Synthetic Future

Selling calls and buying the same amount of puts with the same strike and expiration date, effectively forming the same risk profile of shorting a stock but with no net credit.

Short Selling

Selling a security which you don't actually own beforehand. You will eventually have to buy it back, hopefully at a reduced price, thus making profit.

Sigma

Sigma is generally a term used to represent volatility. It is generally represented as a percentage. The term "one sigma level" refers to the actual change in the underlying asset price.

Small-cap Stocks

Smaller (and sometimes newer) companies which are associated with high risk and high potential rewards. Can be illiquid to trade with large bid-ask spreads.

Speculator

A trader who aims to make profit by correctly assessing the direction of price movement of the security. Generally distinguished from investors in that speculators are associated with short term directional trading.

Spread

The difference between the bid and ask of a traded security.A trading strategy which involves more than one leg to create a (hedged) position.A price spread is the difference between the high and the low of a price bar.

Standard & Poor's (S&P)

A company that rates stocks and bonds and produces and tracks the S&P indices.

Stochastic

A technical indicator, which is an oscillator based on the relationship of the open, high, low, close of price bars.

Stock

A share of a company's stock is a unit of ownership in that company.

Stock Exchange or Stock Market

An organised market where buyers and sellers are brought together to trade stocks.

Stock Split

Where a company increases the amount of outstanding stock, thus increasing the number of shares, reducing the value per share. Generally a sign that the stock has been rising and management's way of assisting the liquidity in the stock.

Stop Orders

Buy Stops: where the order price is specified above the current value of the security. Sell Stops: where the order price is specified below the current value of the security.

Straddle

A neutral trade that involves simultaneously buying a call and put at the same Strike price and with the same Expiration date. Requires the underlying asset to move in an explosive nature (in either direction) in order to make the trade profitable.

Strangle

A neutral trade that involves simultaneously buying a call and put at different Strike prices (the Put Strike being lower than the Call Strike - ie both OTM) and with the same Expiration date. Requires the underlying asset to move in an explosive nature (in either direction) in order to make the trade profitable.

Strap

A neutral to bullish trade that involves simultaneously buying two calls and a put with the same strike price and expiration date. Requires the underlying asset to move in an explosive nature (preferably upwards) in order to make the trade profitable.

Strike Price (Exercise Price)

The price at which an asset can be bought or sold by the buyer of a call or put option.

Strip

A neutral to bearish trade that involves simultaneously buying two puts and a call with the same strike price and expiration date. Requires the underlying asset to move in an explosive nature (preferably downwards) in order to make the trade profitable.

Support

A price threshold on a price chart which is thought to be difficult for the price to fall down through because of past price movements.

Synthetic Call

Buying a share and a put, or going long a future and a put, replicating the risk profile shape of a Long Call.

Synthetic Put

Buying a call and shorting a stock or future, replicating the risk profile shape of a Long Put.

The fair value calculation of an option using a pricing technique such as Black-Scholes options pricing formula.

Theta (decay)

The sensitivity of an option price to the variable of time. Remember that options only have a finite life (until Expiration), therefore theta is an extremely important sensitivity to consider.

Tick

The least amount of price movement recorded in a security. Currently the lowest being 1/32, however moves to decimalisation will eliminate the fractions structure.

Time Premium

The non Intrinsic component of the price of an option.

Time Value (Extrinsic Value)

The price of an option less its intrinsic value. Out of the Money Options are entire made up of Extrinsic (or Time) Value.

Treasury Bill (T-Bill)

A short term government debt security with a maturity of no more than 1 year. The interest charged on these instruments is known as the Risk Free Rate.

Treasury Bond (T-Bond)

A fixed interest US government debt security with 10 years or more to maturity.

Treasury Note (T-Note)

A fixed interest US government debt security with between 1 to 10 years to maturity.

Triple Witching Day

The third Friday in March, June, September and December when US stock options, index options and futures contracts all expire at the same time. The effect of this is often increased volume and volatility as traders look to close short and long positions.

The sensitivity of an option price to volatility. Typically, options increase in value during periods of high volatility.

Volatility

The measure of the fluctuation in the price movement in an security over a period of time. Volatility is one of the most important components in the theoretical valuation of an option price.Historical Volatility: the standard deviation of the underlying security (closing) price movement over a period of time (typically 21-23 days)Implied Volatility: the calculated component derived from the option price when using the Black-Scholes Option Pricing model. Where there is a significant discrepancy between Implied and Historical Volatility then there is the opportunity for the trader to take advantage of this.

Volatility Skew

Whereby deep OTM options tend to have higher Implied Volatilities than ATM options. Where there are discrepancies, this, again gives the trader the opportunity to make trades whose profits are determined by volatility action as opposed to directional price action.

Volume

The number of underlying securities traded on their particular part of the exchange.Where price direction and volume bars are aligned in the same direction then this is a bullish sign (ie it means that prices are rising with increased volume or that prices are falling with decreased volume).Where price direction diverges from volume bars then this is a bearish sign (ie prices rising with falling volume or prices falling with rising volume).